# Cash Flow and Net Present Value

Fair market value of the firm:

Rm: Prime rate = 9% rf: risk free rate = 7.2% Average Unleveraged beta bu = = .839 Assume that growth rate : g = 2%, RPm = 4% , tax rate is 35% Unlevered cost of equity rsu = rf + RPm (bu) = 7.2% + 4%(.839) = 10.56% Operating cash flow using base case projections:

19951996199719981999

Cash Flow7,7729,2339,80710,29210,513

Interest Expenses3,5873,0422,3241,507599

Interest * Tax rate1255.451064.7813.4527.45209.65

TV1999 = 10513 + (10513*1.02)/(10.56%-2% ) = $135.81 Million Vunlevered = Net present value of future operating cash flow = $ 110.9 million. The firm cost of debt: Rd = 9% + 1.5% = 10.5%

V taxshield= Net present value of interest tax savings = $3 million Fair market value of the firm = 110.9+ 3 = $113.9 M

Operating cash flow using management case projections: This case yields very high growth rate. Assume growth rate is 6%

19951996199719981999

Cash Flow7353922410,72412,30813,736

Interest Exp.3,6103,0912,3291,349226

Interest * Tax Rate1263.51081.85815.15472.15...

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